Oil Consortium Agreement With Azerbaijan: 1. The Issue
Oil Consortium Agreement With Azerbaijan: 1. The Issue
Oil Consortium Agreement With Azerbaijan: 1. The Issue
Part I. Identification
1. The Issue
On 20 November 1994 a consortium of oil companies signed a contract with the nation of
Azerbaijan. The consortium, led by British Petroleum, is to invest $8 billion for oil
production over a period of 30 years. The consortium is made up of the American
companies Amoco Corp., Exxon Corp., McDermott International Inc., Pennzoil Co., and
Unocal Corp.; British Companies, British Petroleum PLC and Ramco; Norway's Statoil;
Turkish Petroleum; Saudi Arabia's DNKL Oil; Lukoil, the State oil firm of Russia; and the State
Oil Company of Azerbaijan. The consortium believes it can extract up to 4 billion barrels of
oil from three wells in the Caspian Sea. However, a problem has developed dealing with the
route the oil will take to the world market. At the moment there are three alternatives to
choose from; One which would transport oil north from the Azerbaijani port of Baku
through Russia; second, which would transport the oil through Georgia; and finally, a
southern route through Armenia and Turkey.(Pope 1994, 1) There are many environmental
aspects to the issue. They all basically deal with the possibility of damage or destruction of
the pipelines. This is due to the fact that this is a politically volatile region of the world.
2. Description
In 1990 the government of Azerbaijan began negotiating a possible oil deal with the
British oil giant British Petroleum. Both sides saw that there was chance to earn large profit
from the deal. Azerbaijan needed desperately to redevelop its obsolete oil drilling and
refinery equipment (production had fallen to 1900 levels and was declining at a rate of 6
percent per year.) As for British Petroleum, this was a chance to enter into a vastly
underdeveloped market. In addition, Azerbaijan no doubt recognized the political benefits
to come from an agreement, namely independence and hard currency, which mattered
greatly in the early post-Cold War. Finally, after three years of negotiation a deal was
struck.(Pope 1994, 3)
While the consortium finally have the agreement signed, there was a problem that
required immediate attention. Their plan is to sell the oil on the world market. As such, the
oil must be transported from Baku, the Azerbaijani port of origin to potential world clients
by way of the Turkish port of Ceyhan. There were 3 possible routes to be taken. The first
involves constructing a pipe line from Baku to the west in neighboring Georgia. From there
it would be shipped to Ceyhan. A second would involve constructing a pipeline that would
travel south through Armenia into Turkey to Ceyhan. Finally, an existing pipeline could be
used by sending the oil north to the Russian port of Novorossiysk, from there it would be
shipped to Ceyhan.(Daniloff 1995, C2)
All the nations involved stand to earn a great deal from the agreement, particularly
Russia. For one thing, Russia wants to retain a 'special' (influential) relationship with those
states that were former members of the Soviet Union. It would lose this opportunity, it
feels, if a distribution route that bypasses Russia is chosen. In addition, there is a great deal
of money to be made from this agreement through sales, profits and tariffs from oil crossing
the Russian border. . . hard currency that the nation is in dire need of. Lastly, and perhaps
most importantly, there is the issue of Russian security. Russia is fearful that it will be in a
negative position if it did not have a hand in oil distribution because the deal is between a
former member of the Union and current members of NATO. In addition, if the Azerbaijani
consortium turns out to be successful, there is another former republic, Kazakhstan, that is
in a position to be as successful as, if not more so than Azerbaijan. This is due to the large
reserves of oil it holds in the Caspian Sea.
For Azerbaijan, the issue also relates to security. Azerbaijan will gain both physical and
financial stability. The chances of increasing its per capita income are much greater due to
its contract with the consortium. This increased financial stability will allow it to have
greater control over its dometic and international affairs. In addition, it will be provided
with perhaps true and final independence from its former overlord, Russia. The West also
can gain security from the consortium. It would be a chance to reduce its reliance on the
Persian Gulf as a source of oil.
The choices to be made are thus influenced by a myriad of details. However, there is one
rather important issue which has not been discussed, the environment. The environment
serves to be severely damaged if any number of very likely events occur. Firstly, the threat
of terrorism on every possible pipeline route is very high. The first route is through Georgia,
which has not yet rid itself of the horrors of civil war. Thus there is the possibility of the
pipeline being targeted by the combatants. The second route, through Armenia, is the sight
of an almost 7 year clash with Azerbaijan over the disputed Ngorno-Karabakh region. The
final route through Russia directly traverses the Chechen war zone. In addition, the Russian
oil pipelines are in a horrendous state of upkeep, with over 700 spills per year.(BBC
Monitoring Service 1995, 2) There is also the likely possibility that the Caspian Sea itself will
be polluted by any number of possible mishaps. Finally, if one of the first two oil routes
were chosen, oil would have to be shipped to Turkey through the already overcrowded
Bosporus Sea channel. Thus animal or fish life, the very ecosystem itself, could be adversely
affected by pipeline or shipping spills.
The decision on which route to use faced a lengthy debate. Finally, on October 9 1995, in
a show of compromise, the twelve member consortium agreed to have 2 pipelines. The first
will be the Russian route. The 1400 kilometer route will traverse Chechnya and end at the
Black Sea port of Novorossisk. The construction of 27 km of new pipeline is required. The
second route will be through Georgia to its Black Sea port of Batumi. This 920 km pipeline
requires the construction of 140 km of new pipeline. This decision reflects, in part, geo-
political influences. In one sense, the consortium was influenced by the Western
governments to accept a Russian route, this was done so Russia would not feel alienated.
Secondly, selecting 2 routes disallows Russia from having a strangle-hold over oil
distribution.(Clark and Levine 1995, 1) Though a decision has been finally reached, it leaves
much to be desired environmentally.
3. Related Cases
See BOSPORUS Case
See EXXON Case
See ECUADOR Case
See SHETLAND Case
See SHELLRIG Case
See OGONI Case
KEY WORDS
4. Draft Author
Michael Goulet
Legal Cluster
The consortium has recently agreed on a pipeline route, however, there is still work to be
done concearning construction of new areas of pipeline, as well as security for the line
running through Georgia.
7. Decision Breadth
Number of Parties Involved: 12 - United States, England, Norway, Azerbaijan, Russia, Saudi
Arabia, Iran ,Turkmenistan, Kazakhstan, Ukraine, Romania, Bulgaria
These are the nations which are involved in the consortium, as well as those nations which
surround the Caspian and Black Seas.
This is a nongovernmental agreement between several oil companies, albeit that 2 of these
companies are state owned.
Geographic Filters
9. Geography
a) Geographic Species Domain: Asia
This is a non-governmental agreement between oil companies that was approved by the
government of Azerbaijan and corresponds to the laws regulating business agreements of
the other signatories.
The environmental impact of this agreement will be felt in and around the Caspian and
Black Seas.
Trade Filters
d.Related to Process: No
Employment:
PETROLeum
Environmental Cluster
The outcome of an accident such as an oil spill in the area of the Caspian or Black Sea, or in
the pipeline system on land would undoubtedly have a high impact on and effect both the
composition and scale of the wildlife and its habitat.
There are a number of alternatives to the use of oil as an energy source. If there was a
serious attempt made at using these alternatives then this could alleviate the dangers of oil
spills. However, considering that this is not very likely, then the next best alternative would
be using energy substitutes.
Other Factors
25. Culture
No
No
The conflicts between Azerbaijan and Armenia and between Russia and Chehnya (also less
obvious is that between Russia and the former republics of the Soviet Union) serve to raise
caution against terrorist incidents against the pipelines/drilling equipment or outright
conflict between members.